“Market Urbanism” refers to the synthesis of classical liberal economics and ethics (market), with an appreciation of the urban way of life and its benefits to society (urbanism). We advocate for the emergence of bottom up solutions to urban issues, as opposed to ones imposed from the top down.

Tyler Cowen has two new, self-recommending posts questioning whether or not market urbanist arguments are internally consistent. He argues that if land-use regulations are analogous to a tax on land, then either the benefits of deregulation would go to landowners or the costs of regulation are greatly overstated. The problem with this argument is that zoning is not a Georgist tax in which landowners are taxed in proportion to their land’s value; rather, zoning hugely decreases the value of the country’s most valuable land, while it props up the value of land that would be less desirable absent zoning.

This is because zoning only acts as a tax on land to the extent that regulations are actually binding. A 250-foot height limit would create zero costs for the vast majority of the country, but would be devastating in Manhattan. Likewise, the large variation in land-use regulations across localities means that the costs of land-use regulation are imposed unevenly, even though there may be some correlation between land value and the tax imposed by zoning. Their repeal would have complicated and mixed effects.

Tyler’s post focuses on desirable neighborhoods within the nation’s most highly-demanded cities because it assumes large increases in Ricardian rents from liberalization, i.e. those places where zoning is often the most binding. A broader view would also consider what would happen outside hip neighborhoods, especially exurban commuter suburbs that mostly exist because workers are excluded from areas closer to city centers. These suburbs could see land values plummet under broad liberalization. Whether these price changes are good or bad is a value judgement, but Tyler’s theoretical distributional concerns should also take potential decreases in land value into account.

Empirically, cities with more liberal land-use regimes are more affordable, so the premise of zoning being analogous to a land value tax may not be accurate. Toronto, Houston, Chicago, and Washington, DC all demonstrate that permitting construction makes housing more affordable relative to more restrictive cities. DC, the least liberal of these cities, has experienced so much upzoning through planned unit developments that rental rates have grown at about half the rate of inflation over the past year, even with two percent population growth. Many of the benefits of DC’s new construction have gone to landowners and to high-productivity workers who have moved into the city. But as the city’s flat rental rates demonstrate, the construction has allowed the city to accommodate population growth without seeing a spike in housing prices. Absent this new construction in DC, relatively affordable Maryland suburbs would have seen greater housing price increases. Cities don’t need to be market-urbanist utopias for the benefits of development to be shared widely.

Allowing more people to live in cities has important benefits for workers, even if landowners get rich along the way. With an innovative panel dataset on land-use regulation and cross-state income convergence, Peter Ganong and Daniel Shoag test whether or not this anecdotal evidence is supported with demographic trends. They find that a surge in land-use restrictions since 1980 has slowed the rate of hourly wage convergence across states. Given that regulation has reduced income mobility, there’s good reason to believe that deregulation would increase income mobility by making high-productivity places more accessible.

Zoning itself has additional negative distributional aspects because rich people have resources to devote to NIMBYism. Stephen and Adam have pointed out that it’s easiest for developers to build new construction within the low-income neighborhoods of expensive cities. When people are illegally living in abandoned industrial properties or aged housing, rezoning those properties as high-rise residential will make the city more expensive, not less. It’s a tragedy of urban politics that high-income neighborhoods often have enough political clout to block all new construction, leading to an increase in housing prices when new building is pushed into neighborhoods with low-cost housing. Incumbent landowners often block new housing, not to increase the value of their landholdings, but to exclude undesirable social groups, to keep low-income children out of public schools, and to engage in status-seeking. This is why many market urbanists have devoted so much time to advocating for reforms that move land-use decisions to higher levels of government where parochial interests carry less weight.

It is theoretically possible for development to make low-income people worse off at a hyper-local level if the new construction attracts high-income people to the city faster than new stock is built. How much deregulation is needed to benefit low-income people is an empirical question, but Tyler (barely) concedes:

Maybe — maybe, maybe, maybe — if you remove so many building restrictions, land won’t be the scarce factor any more and the gains from the tax reduction will be distributed in many directions.

Perhaps the political realities of the Bay Area are such that feasible reforms will only increase rents by attracting more high-productivity workers. But at the regional level, the data demonstrates a clear correlation between the level of regulation and housing affordability. Tyler is right that eliminating land-use regulations in very desirable locations will benefit land owners financially, but his distributional concerns should be eased by the fact that these same landlords will be earning rents by engaging in consensual, positive-sum transactions rather than social exclusion.

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Ben Ross

Cowen seems to assume that deregulation necessarily means building skyscrapers in a tight area downtown. (It’s easy to see how he’d fall into that trap if he’s reading Kotkin.)

Deregulation to allow “missing middle” housing in outer city neighborhoods and inner-ring suburbs will have the opposite effect. It will add value to land owned by middle-income homeowners, while siphoning off demand from the inner urban areas.

Issi Romem

Nice piece!

Ben Jamin’

1. High land values are the result of efficient exploitation of agglomeration effects and a preference for locational amenity over spending on alternative goods and services.

As such, aggregate land values are a better economic indicator than GDP. The higher the better.

2. Problems of inequality and efficiency (and symptoms like affordability issues) only happen when these land values are capitalised into rental income and selling prices. The taxation of income/capital and the failure to tax land at 100%, acts as a transfer of wealth and welfare, from those who own relatively little or no land (by value) compared to the taxes they currently pay, to those who own relatively more land by value compared to the taxes they pay.

This lowers discretionary incomes for one group, making housing among other things, less affordable. While in an equal and opposite way, raising discretionary incomes for another, lowering their housing costs.

3. So, there cannot be an affordability crisis in aggregate. Affordability issues for one group is caused by a transfer of wealth crisis, which is merely a symptom of an unfair and inefficient economic system.

4. We can put some numbers on this, using data from the UK as an example.

There, a shift from taxing income/capital to an LVT would leave a typical working household around £11K better off in their pockets every year. The reduction in selling prices from a 100% LVT would also save them around £6K in mortgage interest. Taken together, the increase in discretionary incomes, and the lowering of house prices, would result in a four fold increase in housing affordability, as a ratio of discretionary income, for that typical household.

5. At the same time, the collection of land rents would allow the markets to allocate that resource at optimal efficiency, reducing vacancy, under occupation, land banking and sprawl.

There would be quite a lot of upsizing, downsizing etc. So, even if the typical family above didn’t get the full £11K as discretionary income, they would gain the same value in economic welfare from a move to a bigger/better location. Most likely a combination of the two.

6. Zoning/planning regulations, that provide locational amenity would thus be preserved, as its value would be fully internalised by an LVT.

So, those excluded from nice locations are fully compensated, via the market, by those who gain from excluding them.

7. Blaming zoning/planning is akin to throwing the baby out with the bath water. Building loads of new homes will not address the transfer of wealth crisis, but merely dilute the problem. It will do so at the expense of adding to existing inefficiencies in the housing/land market, lowering economic welfare, and adding to costs.

Andrew

In what way is that bad? Many urban cores just have so much demand that you can’t keep building up more at a fast enough rate, so why not turn all the cheap suburban area’s into higher density development?